The arbitrability of fraud in India

Last month, the Supreme Court decided an important point relating to the arbitrability of fraud. Against the backdrop of a complicated set of facts, the Court was called on to consider whether Indian Court proceedings could be stayed pursuant to section 45 of the Arbitration and Conciliation Act 1996 in favour of a foreign-seated arbitration, in cases where allegations of fraud fell to be considered by the arbitral tribunal.

Previous decisions of the Supreme Court (in particular, N Radhakrishnan v Maestro Engineers and Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak) have held that a similar stay will not be granted under section 8 of the 1996 Act in favour of a domestic arbitration, “when serious allegations of fraud are made which it is desirable should be tried in open court”. The Supreme Court in World Sport Group (Mauritius) v MSM Satellite (Singapore) distinguished these decisions as not applying to stays in favour of foreign-seated arbitrations. This is not only a very welcome decision, but also helps to shed some light on the rationale of the Court’s reluctance to stay arbitration proceedings under section 8 when ‘serious allegations’ of fraud have been made. As explained below, the only way of reconciling the Court’s decisions on this issue is by concluding that ‘fraud’ is considered arbitrable by Indian law, but cases involving serious allegations of fraud may not be referred to domestic arbitrations on other grounds.

A comparison between section 8 and section 45 is instructive in this context:

Section 8:
A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

Section 45:
Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908, a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

On the face of it, there appear to be no restrictions on the Court’s obligations to stay proceedings under section 8. In fact, its predecessor (section 34 of the 1940 Act), contained an additional qualification – “if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration” – which is absent from section 8. Interestingly, section 86 of the English Arbitration Act also provides that when staying court proceedings in favour of domestic arbitrations, the Court may consider whether “there are other sufficient grounds for not requiring the parties to abide by the arbitration agreement”.

The absence of any such qualifications in section 8 suggests however that it is at least as broad as section 45, if not broader. This interpretation of section 8 was however rejected by the Madras High Court in Oomor Sait HG Vs. Asiam Sait which held that although this provision was absolute in its terms, the Court may refuse to stay proceedings when wherever the dispute involves consideration of substantial questions of law or complicated questions of fact which would depend upon detailed oral and documentary evidence. This line of reasoning seems to suggest that fraud is not arbitrable in India, which is different from the line of reasoning adopted earlier by the Supreme Court in Abdul Kadir which had relied on the more permissive language of section 34 of the 1940 Act. The affirmation of both these decisions, without comment, by the Supreme Court in N Radhakrishnan serves to further muddy the waters. Therefore, prior to the decision in World Sport Group, it wasn’t clear if Indian law held fraud to be unarbitrable (a question of competence) or if it merely retained the discretion of Courts to not refer some matters to arbitration (along the lines of section 34 of the 1940 Act).

The reason this distinction is material is because section 45 provides that an Indian court must stay proceedings in favour of foreign-seated arbitrations, unless the said agreement is null and void, inoperative or incapable of being performed. However, section 45 only applies to arbitration agreements to which the New York Convention applies. Article II(1) of the Convention states that it applies only to arbitration agreements concerning a subject matter “capable of settlement by arbitration”, and goes on (in Article II(3)) to provide that when faced with such an arbitration agreement, domestic courts must stay proceedings in favour of arbitration unless the said agreement is “null and void, inoperative or incapable of being performed”. Therefore, the arbitrability of the subject matter of the arbitration is a pre-condition to the stay under section 45.

As a result, if Indian law considers fraud to be ‘unarbitrable’ (following the reasoning of the Madras High Court in Oomos Sait), then irrespective of whether the stay is being sought under section 45 or section 8, Indian courts cannot refer disputes involving issues of fraud to arbitration. That conclusion is at odds with the decision in World Sport Group, and therefore suggests that Indian law considers fraud to be arbitrable. However, when staying court proceedings in favour of domestic arbitrations, it may hesitate to do so when the dispute involves serious allegations of fraud.

Although this reconciliation of the Supreme Court’s jurisprudence does help to clarify its approach to the arbitrability of fraud, it leaves the following questions unanswered:

What is the basis for reading down the absolute nature of section 8, to allow the refusal of a stay on grounds other than non-arbitrability? It is instructive that Abdul Kadir was decided under the 1940 Act. Does the absolute nature of section 8 suggest that considerations which would have been relevant under the 1940 Act, no longer are?

If disputes involving fraud are not referred to arbitration for reasons other than arbitrability, what are the factors the Court considers in deciding whether or not to grant the stay under section 8? Although the Supreme Court in Abdul Kadir grants some steer on this question, further clarity on this would be welcome.

Finally, and most importantly, does this reconciliation actually reflect the basis on which the Supreme Court in World Sport Group distinguished its previous jurisprudence? Unfortunately, the report of the judgement does not indicate that the question of ‘arbitrability’ was argued before the Court and, in any event, the Court appears to distinguish Abdul Kadir and N Radhakrishnan purely on the basis that they dealt with domestic arbitration, without explaining why the line of reasoning adopted in those cases was not relevant when considering section 45.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Many of the links on this blog will take you to sites operated by third parties. The contributors of this blog have not reviewed all of the information on these sites or the accuracy or reliability of any information, data, opinions, advice, or statements on these sites. The contributors do not endorse these sites, or opinions they may offer. These third-party links are offered solely for the purpose of discussion and thinking on Indian corporate law and other related topics. It is also possible that some of the pages linked may become inactive after the lapse of a period of time.